BUSI 294

Supplemental Problems – Module 5: Cost-Volume-Profit

Question 1

The Science Centre is preparing for its annual appreciation event for local donors. Last year, 500 donors
attended the event. Tickets for the event were $20 per person. Last year’s statement of income is below:

Ticket sales $10,000

Cost of dinner 11,000
Gross margin (1,000)
Invitations and paperwork 3,000
Profit (loss) (4,000)

This year the dinner committee does not want to lose money on the event. To help achieve its goal, the
committee analyzed last year’s costs. Of the $11,000 total cost of the dinner, it was determined that
$6,000 were fixed costs and $5,000 were variable costs. Of the $3,000 for invitations and paperwork,
$2,500 were fixed and $500 were variable.

Required:

1. Prepare last year’s profit report using the contribution margin format
2. The committee is considering expanding this year’s dinner invitation to include volunteers (in
addition to donors). If the committee expects attendance to double, calculate the effect this will
have on the profitability of the dinner.
Question 2

Mirabel Cosmetics manufactures and sells a face cream to small family-run stores in the greater Montreal
area. It presents the monthly operating statement of comprehensive income here to Francois Laval, a
potential investor in the business. Help Laval understand Mirabel’s cost structure.

Mirabel Cosmetics
Operating Statement of Comprehensive Income
For the Month of June 2016
Units sold 10,000
Revenue $100,000
Cost of goods sold:
Variable manufacturing costs $55,000
Fixed manufacturing costs 20,000
Total 75,000
Gross margin 25,000
Operating costs:
Variable marketing costs 5,000
Fixed marketing costs 10,000
Total operating costs 15,000
Operating income $10,000
Required:

1. Recast the statement of comprehensive income to emphasize contribution margin

2. Calculate the contribution margin percentage and breakeven point in units and revenues for June
2016.
3. What is the margin of safety (in units) for June 2016?
4. If sales in June were only 8,000 units and Mirabel’s tax rate is 30%, calculate its net income
Question 3

Beans Unlimited sells specialty coffees in 1-kilogram packages. Fixed costs are budgeted at $730,000 per
year. For the upcoming year, revenues are forecasted to be $3,240,000 (selling price is $36 per kilogram)
and the company has an average contribution margin percentage of 48%.

Required:

1. What is the budgeted operating income given the sales forecast?

2. Beans is considering reducing its fixed costs by 15%. This would result in a lowering of the
contribution margin percentage to 42%. What would be the new forecasted operating income?
3. Another alternative Beans is considering is raising its selling price by 10%. Its estimates this would
result in a reduction in sales volume of 5%. There would be no changes to variable or fixed costs.
What would be the forecasted operating income with the new selling price and volume? What is
the new contribution margin percentage?
4. Which strategy would you recommend to the company?
Question 4

Durdon Snowboards sells two models of snowboards: the Men’s Dominator and the Ladies’ Luxury.
Information on the two models is below:

Product Unit Selling Price Unit Variable Cost Sales Commission

Dominator $750 $475 $25
Luxury $640 $390 $21

Of Durdon’s total sales, 70% are for the Men’s Dominator model. The company’s annual fixed costs are
$180,000.

Required:

1. Compute the unit contribution margin for each model of snowboard

2. Compute the weighted-average contribution margin assuming a constant sales mix
3. If the company’s target operating income is $115,000, how many units of each model of
snowboard must be sold to achieve the company’s goals?
Question 5

Zycron Ltd. Is a computer games manufacturer. It currently has two games on the market: Alien Predators
and Vegas Pokermatch. Data regarding the two products are as follows:

Alien Predators Vegas Pokermatch

Selling price $89 $59
Variable manufacturing costs 18 12
Variable marketing costs 27 16

The fixed costs of Zycron are $18,750,000, and the current sales mix is 40% Alien Predators and 60% Vegas
Pokermatch.

Required:

1. Assuming no change in sales mix, costs, or revenues, what is the breakeven point in total units?
How many units of Alien Predators and how many units of Vegas Pokermatch are sold at the
breakeven point?
2. Assume the following sales mix: 20% Alien Predators and 80% Vegas Pokermatch. Calculate the
breakeven point under this sales mix assumption.
3. For the two possible sales mixes (in requirements 1 and 2), determine operating income if total
unit sales are 750,000.